SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-21940
Donnkenny, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0228891
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 Broadway, New York, NY 10018
---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 790-3900
--------------
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), Yes X No ___ and (2) has been
the subject to such filing requirements for the past 90 days. Yes X No ___.
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Common Stock $0.01 par value 4,367,417 .
---------------------------- --------------------------------
(Class) (Outstanding at November 9, 2001)
DONNKENNY, INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-Q)
PART I - FINANCIAL INFORMATION Page
----
Consolidated financial statements:
Independent Accountants' Report
Balance sheets as of September 30, 2001 (unaudited) and December 31, 2000.................I-1
Statements of operations for the three and nine months ended
September 30, 2001 and 2000 (unaudited)..................................................II-1
Statements of cash flows for the nine months ended
September 30, 2001 and 2000 (unaudited).................................................III-1
Notes to Consolidated Financial Statements (unaudited) ...............................IV-1-4
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................V-1-4
PART II - OTHER INFORMATION
Legal Proceedings and Other Information..................................................VI-1
Exhibits and Reports on Form 8-K.........................................................VI-1
Signatures...............................................................................VI-2
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of Donnkenny, Inc.
We have reviewed the accompanying consolidated balance sheet of Donnkenny, Inc.
and subsidiaries as of September 30, 2001, and the related consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 2001 and 2000 and cash flows for the nine-month periods ended
September 30, 2001 and 2000. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Donnkenny, Inc. and subsidiaries as of December 31, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated March 21,
2001 (March 28, 2001 as to note 6), we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 2000 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
DELOITTE & TOUCHE LLP
New York, New York
November 9, 2001
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
September 30, December 31,
2001 2000
-------------------- ----------------
(Unaudited)
CURRENT ASSETS
Cash ........................................... $ 44 $ 65
Accounts receivable - net of allowances of
$153 and $109, respectively ................... 32,525 30,968
Recoverable income taxes ....................... 143 155
Inventories .................................... 28,027 19,730
Deferred tax assets ............................ 1,482 1,482
Prepaid expenses and other current assets ...... 1,910 1,177
Assets held for sale ........................... 1,142 1,206
---------- ----------
Total current assets ........................... 65,273 54,783
PROPERTY, PLANT AND EQUIPMENT, NET .................. 5,469 5,076
OTHER ASSETS ........................................ 408 430
INTANGIBLE ASSETS ................................... 29,937 31,054
---------- ----------
TOTAL ............................................... $ 101,087 $ 91,343
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............ $ 1,183 $ 1,523
Accounts payable ............................. 13,270 11,751
Accrued expenses and other current liabilities 2,868 2,310
---------- ----------
Total current liabilities ................. 17,321 15,584
---------- ----------
LONG-TERM DEBT ...................................... 48,603 40,624
DEFERRED TAX LIABILITIES ............................ 1,482 1,482
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value; authorized 500
shares , issued none .......................... -- --
Common stock, $.01 par value. Authorized 10,000
shares, issued and outstanding 4,367
shares in 2001 and 2000 ........................ 44 44
Additional paid-in capital ...................... 50,449 50,449
Deficit ......................................... (16,812) (16,840)
---------- ----------
Total Stockholders' Equity ....................... 33,681 33,653
---------- ----------
TOTAL ............................................... $ 101,087 $ 91,343
========== ==========
See accompanying notes to consolidated financial statements.
I-1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------ --------------
NET SALES ............................................. $ 44,242 $ 39,710 $ 112,089 $ 109,837
COST OF SALES ......................................... 33,947 31,777 86,369 89,850
---------------- ------------- ------------ --------------
Gross profit ..................................... 10,295 7,933 25,720 19,987
OPERATING EXPENSES:
Selling, general and administrative expenses ...... 7,542 6,795 20,781 20,841
Provision for settlement of litigation ............ -- -- -- 349
Amortization of goodwill and acquisition costs .... 372 361 1,117 1,056
Restructuring charge .............................. -- -- -- 500
------------- ------------- ------------ --------------
Operating profit (loss) ....................... 2,381 777 3,822 (2,759)
INTEREST EXPENSE ...................................... 1,233 1,262 3,659 3,384
------------- ------------- ------------ --------------
Income (Loss) before income taxes ............. 1,148 (485) 163 (6,143)
INCOME TAXES .......................................... 45 5 135 88
------------- ------------- ------------ --------------
NET INCOME (LOSS) ............................... $ 1,103 $ (490) $ 28 $ (6,231)
============= ============= ============ ==============
Basic income (loss) per common share ................. $ 0.25 $ (0.11) $ 0.01 $ (1.63)
============= ============= ============ ==============
Shares used in the calculation of basic income (loss)
per common share .................................. 4,367,417 4,277,743 4,367,417 3,818,767
================ ============= ============ ==============
Diluted income (loss) per common share ................ $ 0.25 $ (0.11) $ 0.01 $ (1.63)
================ ============= ============ ==============
Shares used in the calculation of diluted income (loss)
per common share ................................... 4,394,606 4,277,743 4,384,067 3,818,767
================ ============= ============ ==============
See accompanying notes to consolidated financial statements.
II-1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
-----------------------------------
September 30, September 30,
2001 2000
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ 28 $ (6,231)
Adjustments to reconcile net cash provided by (used in)
operating activities:
Depreciation and amortization of fixed assets ......... 807 587
Write down of fixed assets ............................ -- 200
Net loss on disposal of fixed assets .................. 2 --
Amortization of intangibles and other assets .......... 1,117 1,056
Provision for losses on accounts receivable ........... 44 (11)
Changes in assets and liabilities:
Increase in accounts receivable ....................... (1,601) (4,058)
Decrease in recoverable income taxes .................. 12 156
(Increase) decrease in inventories .................... (8,297) 4,802
Increase in prepaid expenses and
other current assets .................................. (733) (990)
Decrease in other non-current assets .................. 21 24
Increase in accounts payable .......................... 1,519 1,042
Increase (decrease) in accrued expenses and
other current liabilities .......................... 558 (1,209)
--------------- ---------------
Net cash provided by (used in) operating activities ... (6,523) (4,632)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets .............................. (1,137) (391)
Proceeds from sale of fixed assets .................... -- 189
Acquisition of business ............................... -- (1,485)
--------------- ---------------
Net cash used in investing activities ................. (1,137) (1,687)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................... (1,164) (874)
Net borrowings for acquisition ................ -- 1,300
Borrowings under revolving credit line ........ 120,052 5,790
Repayments under revolving credit line ........ (111,249) --
--------------- ---------------
Net cash provided by (used in) financing activities ... 7,639 6,216
--------------- ---------------
NET (DECREASE) IN CASH ................................ (21) (103)
CASH, AT BEGINNING OF PERIOD .......................... 65 180
--------------- ---------------
CASH, AT END OF PERIOD ................................ $ 44 $ 77
================= ===============
SUPPLEMENTAL DISCLOSURES
Income taxes paid ..................................... $ 77 $ 31
================= ===============
Interest paid ......................................... $ 3,674 $ 3,104
================= ===============
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Issuance of common stock .............................. $ -- $ 705
================= ===============
See accompanying notes to consolidated financial statements.
III-1
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the Rules of the Securities and Exchange
Commission ("SEC") and, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
financial position, results of operations and cash flows. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules. The Company believes the disclosures made
are adequate to make such financial statements not misleading. The results for
the interim periods presented are not necessarily indicative of the results to
be expected for the full year. These financial statements should be read in
conjunction with the Company's Report on Form 10-K for the year ended December
31, 2000. Balance sheet data as of December 31, 2000 have been derived from
audited financial statements of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2001 2000
---- ----
(In thousands)
Raw materials ............................... $ 1,404 $ 1,719
Work-in-process ............................. 727 936
Finished goods .............................. 25,896 17,075
------- ------
$ 28,027 $ 19,730
======= ======
NOTE 3 - DEBT
On June 29, 1999, the Company and its operating subsidiaries signed a
three-year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services. The Credit Agreement provides the Company with a $75 million facility
comprised of a $72 million revolver with sublimits up to $52 million for direct
borrowings, $35 million for letters of credit, certain overadvances and a $3
million term loan.
Borrowings under the Credit Agreement as amended (see below) bear
interest at the prime rate plus two percent (8.50% at September 30, 2001). The
Credit Agreement provides for advances of (i) up to 90% of eligible accounts
receivable plus (ii) up to 60% of eligible inventory plus (iii) up to 60% of the
undrawn amount of all outstanding letters of credit plus (iv) allowable
overadvances. The term loan requires quarterly payments of $0.250 million plus
all accrued and unpaid interest beginning September 30, 1999 through June 30,
2002. The Credit Agreement as amended expires on June 30, 2004.
Collateral for the Credit Agreement includes a first priority lien on
all accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc.
and Beldoch Industries Corporation.
IV-1
The Credit Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain specified levels of tangible net worth and comply with a minimum
earnings before depreciation, amortization, interest and taxes (EBITDA) and a
minimum interest coverage ratio.
During Fiscal 1999 and Fiscal 2000, the Company entered into various
amendments and agreements to waive the Company's noncompliance with financial
covenants on certain dates and to reset overadvanced amounts and covenants.
These amendments and agreements also increased the interest rate on borrowings.
On July 6, 2000, the Company entered into an Amendment to finance the
acquisition of the Ann Travis business (see note 6) by the issuance of an
additional $1.3 million term loan. The new term loan bears interest at the prime
rate plus 2.0 % and is repayable over thirty six months commencing January 1,
2001. A fee of $100,000 was paid for the Amendment.
On March 28, 2001, the Company entered into an Amendment and Waiver
Agreement to extend the Final Maturity Date of the original agreement to June
30, 2004, to waive existing events of default under the Credit Agreement as of
December 31, 2000 with respect to the Company's non-compliance with covenants
related to minimum interest coverage, EBITDA and Tangible Net Worth, and to
amend certain other provisions of the Credit Agreement including covenants and
the level of allowable overadvances to support the Company's 2001 business plan.
Pursuant to this amendment, the interest rate on borrowings was increased to
2.0% above the prime rate effective January 1, 2001. A fee of $200,000 was paid
in connection with the Amendment and Waiver.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .35% of gross sales, plus
certain customary charges. The agreement is in effect through December 31, 2001.
NOTE 4 - RESTRUCTURING CHARGE
The restructuring charge of $0.5 million in the nine months ended
September 30, 2000 is related to the Company's closure of all of its domestic
manufacturing facilities.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
a. On April 27, 1998, Wanda King, a former employee of the Company,
commenced an action against the Company in the United States District
Court for the Western District of Virginia. In her complaint, the
Plaintiff seeks damages in excess of $8.0 million, claiming that she
was constructively discharged by reason of the fact that she resigned
from her position rather than follow alleged improper and illegal
instructions from former employees of the Company. On October 3, 2001,
a hearing was held on the Company's Motion for Summary Judgment before
a United States Magistrate Judge. On October 22, 2001, the Magistrate
Judge, after considering the Motion for Summary Judgment, recommended
to the United States District Court that the case against the Company
be dismissed in its entirety. The Plaintiff has objected to the
recommendation of the Magistrate Judge. The recommendation to dismiss
and the Plaintiff's objection will be reviewed by the Federal District
Judge who will either dismiss the case or, if the Judge finds some of
the issues should be decided by a jury, will schedule a trial date.
IV-2
b. The Company is also a party to legal proceedings arising in the
ordinary course of its business. Management believes that the ultimate
resolution of these proceedings will not, in the aggregate, have a
material adverse effect on financial condition, results of operations,
liquidity or business of the Company.
NOTE 6 - ANN TRAVIS ACQUISITION
On July 1, 2000 the Company acquired certain assets of Ann Travis Inc.
("Ann Travis") for $1.5 million, including costs incurred in the acquisition of
$0.3 million. Ann Travis designs, imports, and markets women's sportswear.
Assets acquired included $0.5 million of certain merchandise inventory, the Ann
Travis and Decade Designs trademarks and the license rights for sales of women's
apparel under the Delta Burke trademark. The purchase was funded by CIT under a
new $1.3 million term loan which requires payments in monthly installments over
three years commencing January 1, 2001 (see note 3). Goodwill of $1.0 million
was recorded in connection with this acquisition and is being amortized over ten
years. The acquisition was accounted for as a purchase.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16 "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises". All business combinations in the scope of this Statement are to be
accounted for using one method, the purchase method. SFAS 141 is effective as
follows: a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS 141
also apply to all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 2001 or later). The Company has determined that the adoption of this
statement will not have an impact on the consolidated financial statements.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17, "Intangible
Assets". It changes the accounting for goodwill from an amortization method to
an impairment only approach. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets recognized
in an entity's statement of financial position at that date, regardless of when
those assets were initially recognized. The Company will cease the amortization
of goodwill, which was recorded in past business combinations on December 31,
2001 as required by SFAS No. 142. Amortization expense was $1.4 million during
fiscal 2000. The Company is currently evaluating the impact of adopting this
pronouncement on its consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company is
IV-3
currently evaluating the impact of adopting this pronouncement on its
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Dispose Of" and provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets. This Statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The Company is currently evaluating the impact of
adopting this pronouncement on its consolidated financial statements.
IV-4
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Net sales increased by $2.3 million, or 2.1% from $109.8 million in the
first nine-months of 2000 to $112.1 million in the first nine-months 2001. The
increase in the Company's net sales was primarily due to increases in Donnkenny
Apparel of $5.2 million, Pierre Cardin Options line of $5.5 million, Ann Travis
of $6.6 million (acquired in July 2000), and the Pierre Cardin Knits line of
$10.8 million. The increases were partially offset by decreases in the Victoria
Jones line of $9.0 million, and the Casey & Max line of $16.8 million.
Gross profit for the first nine-months of 2001 was $25.7 million, or
22.9% of net sales, compared to $20.0 million, or 18.2% of net sales, during the
first nine-months of 2000. The increase in gross profit in dollars and as a
percentage of net sales was primarily attributable to the Company's Pierre
Cardin Knits and Donnkenny Apparel lines, decreases in sales of non-current
inventory due to lower non-current inventory levels on hand, the favorable
impact of the plant closures in Fiscal 2000 and improved sourcing.
Selling, general and administrative expenses remained consistent at
20.8 million.
Net interest expense increased from $3.4 million during the first
nine-months of 2000 to $3.7 million during the first nine-months of 2001. The
increase is attributable to an increase in direct borrowings under the loan
agreement to finance inventory purchases, partially offset by a decrease in the
Company's interest rate.
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
Net sales increased by $4.5 million, or 11.3% from $39.7 million in the
third quarter of 2000 to $44.2 million in the third quarter 2001. The increase
in the Company's net sales was primarily due to increases in the Donnkenny
Apparel line of $3.1 million, the Pierre Cardin Knits line of $7.6 million, and
the Pierre Cardin Options line of $1.2 million. The increases were partially
offset by decreases in the Victoria Jones line of $2.2 million, the Casey & Max
line of $4.6 million, and the Ann Travis line of $0.6 million (acquired in July
2000).
Gross profit for the third quarter of 2001 was $10.3 million, or 23.3%
of net sales, compared to $7.9 million, or 20.0% of net sales, during the third
quarter of 2000. The increase in gross profit in dollars and as a percentage of
net sales was primarily attributable to the Company's Pierre Cardin Knits and
Donnkenny Apparel lines, decreases in the sales of non-current inventory due to
lower non-current inventory levels on hand, the favorable impact of the plant
closures in Fiscal 2000 and improved sourcing.
Selling, general and administrative expenses increased $0.7 million
from $6.8 million in the third quarter of 2000 to $7.5 million in the third
quarter of 2001. The increase in selling, general and administrative expenses
was primarily due to increased design costs, depreciation expense, distribution
costs associated with units shipped and costs associated with the implementation
of a new inventory tracking and distribution system.
V-1
Net interest expense was relatively consistent at $1.3 million and $1.2
million during the third quarters of 2000 and 2001 respectively.
Based on management's evaluation of the performance of the Pierre
Cardin Options and Decade Designs lines, the Company has decided to merge the
Pierre Cardin Options line under the Pierre Cardin brand, and to exit the
women's dress business as of October 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily accounts receivable, inventory and the interest and
principal payments related to certain indebtedness. The Company's borrowing
requirements for working capital fluctuate throughout the year.
On June 29, 1999, the Company and its operating subsidiaries signed a
three year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services to replace the existing $75 million credit facility. The Credit
Agreement provides the Company with a $75 million facility comprised of a $72
million revolver with sublimits up to $52 million for direct borrowings, $35
million for letters of credit, certain overadvances and a $3 million term loan.
Borrowings under the Credit Agreement as amended (see below) bear
interest at the prime rate plus two percent (8.50% at September 30, 2001). The
Credit Agreement provides for advances of (i) up to 90% of eligible accounts
receivable plus (ii) up to 60% of eligible inventory plus (iii) up to 60% of the
undrawn amount of all outstanding letters of credit plus (iv) allowable
overadvances. The term loan requires quarterly payments of $0.250 million plus
all accrued and unpaid interest beginning September 30, 1999 through June 30,
2002. The Credit Agreement as amended expires on June 30, 2004.
Collateral for the Credit Agreement includes a first priority lien on
all accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc.
and Beldoch Industries Corporation.
The Credit Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain specified levels of tangible net worth and comply with minimum
earnings before depreciation, amortization, interest and taxes (EBITDA) and a
minimum interest coverage ratio.
During Fiscal 1999 and Fiscal 2000, the Company entered into various
amendments and agreements to waive the Company's noncompliance with financial
covenants on certain dates and to reset overadvanced amounts and covenants.
These amendments and agreements also increased the interest rate on borrowings.
On July 6, 2000, the Company entered into an Amendment and Waiver
Agreement to finance the acquisition of the Ann Travis business (see note 6) by
the issuance of an additional $1.3 million term loan. The new term loan bears
interest at the prime rate plus 2.0% and is repayable over thirty six months
commencing January 1, 2001. A fee of $100,000 was paid for the Amendment.
V-2
On March 28, 2001, the Company entered into an Amendment and Waiver to
extend the Final Maturity Date of the original agreement to June 30, 2004; to
waive existing events of default under the Credit Agreement as of December 31,
2000 with respect to the Company's non-compliance with covenants related to
minimum interest coverage, EBITDA and Tangible Net Worth; and to amend certain
other provisions of the Credit Agreement including covenants and the level of
allowable overadvances to support the Company's 2001 business plan. Pursuant to
this amendment, the interest rate on borrowings was increased to 2.0% above the
prime rate effective January 1, 2001. A fee of $200,000 was paid in connection
with the Amendment and Waiver.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .35% of gross sales, plus
certain customary charges. The agreement is in effect through December 31, 2001.
As of September 30, 2001, borrowings under the Credit Agreement
amounted to $48.1 million compared to $45.8 million as of September 30, 2000. As
of September 30, 2001, the term loans amounted to $1.7 million.
During the first nine-months of 2001, the Company's operating
activities used cash of $6.5 million principally as a result of increases in
inventory levels related to anticipated fourth quarter sales, increase in
accounts receivable, offset by an increase in accounts payable. Cash used in
investing activities in the first nine-months of 2001 amounted to $1.1 million
primarily relating to the upgrades in the Company's computer systems. Cash used
in investing activities in the first nine-months of 2000 amounted to $1.7
million primarily relating to the acquisition of the Ann Travis business and
upgrades in the Company's computer systems. Cash provided by financing
activities in the first nine-months of 2001 amounted to $7.6 million, primarily
relating to borrowings under the loan agreement. Cash provided by financing
activities amounted to $6.2 million in the first nine-months of 2000 primarily
relating to borrowings under the loan agreement.
The Company believes that cash flows from operations and amounts
available under the credit agreement will be sufficient for its operating needs
in the foreseeable future.
SEASONALITY OF BUSINESS AND FASHION RISK
The Company's principal products are organized into seasonal lines for
sale at the retail level during the Spring, Summer, Transition, Fall and
Holiday Seasons. Typically, the Company's products are designed as much as one
year in advance and manufactured approximately one season in advance of the
related retail selling season. Accordingly, the success of the Company's
products is often dependent on the ability to successfully anticipate the needs
of retail customers and the tastes of the ultimate consumer up to a year prior
to the relevant selling season.
RESTRUCTURING CHARGE
The restructuring charge of $0.5 million in the nine months ended
September 30, 2000 related to the Company's closure of all of its domestic
manufacturing facilities.
V-3
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets.
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16 "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises". All business combinations in the scope of this Statement are to be
accounted for using one method, the purchase method. SFAS 141 is effective as
follows: a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS 141
also apply to all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 2001 or later). The Company has determined that the adoption of this
statement will not have an impact on the consolidated financial statements.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17, "Intangible
Assets". It changes the accounting for goodwill from an amortization method to
an impairment only approach. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets recognized
in an entity's statement of financial position at that date, regardless of when
those assets were initially recognized. The Company will cease the amortization
of goodwill, which was recorded in past business combinations on December 31,
2001 as required by SFAS No. 142. Amortization expense was $1.4 million during
fiscal 2000. The Company is currently evaluating the impact of adopting this
pronouncement on its consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company is currently evaluating the impact of adopting this pronouncement on its
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Dispose Of" and provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets. This Statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The Company is currently evaluating the impact of
adopting this pronouncement on its consolidated financial statements.
V-4
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
a. On April 27, 1998, Wanda King, a former employee of the Company,
commenced an action against the Company in the United States District
Court for the Western District of Virginia. In her complaint, the
Plaintiff seeks damages in excess of $8.0 million, claiming that she
was constructively discharged by reason of the fact that she resigned
from her position rather than follow alleged improper and illegal
instructions from former employees of the Company. On October 3, 2001,
a hearing was held on the Company's Motion for Summary Judgment before
a United States Magistrate Judge. On October 22, 2001, the Magistrate
Judge, after considering the Motion for Summary Judgment, recommended
to the United States District Court that the case against the Company
be dismissed in its entirety. The Plaintiff has objected to the
recommendation of the Magistrate Judge. The recommendation to dismiss
and the Plaintiff's objection will be reviewed by the Federal District
Judge who will either dismiss the case or, if the Judge finds some
of the issues should be decided by a jury, will schedule a trial date.
b. The Company is also a party to legal proceedings arising in the
ordinary course of its business. Management believes that the ultimate
resolution of these proceedings will not, in the aggregate, have a
material adverse effect on financial condition, results of operations,
liquidity or business of the Company.
ITEM 2. Not Applicable
ITEM 3. Not Applicable
ITEM 4. Not Applicable
ITEM 5. Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
None
a. Reports on Form 8-K
The Company filed no reports on Form 8-K during the third quarter
ended September 30, 2001.
VI-1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Donnkenny, Inc.
Registrant
Date: _____________, 2001 /s/ Daniel H. Levy
--------------------
Daniel H. Levy
Chairman of the Board,
Chief Executive Officer
Date: _____________, 2001 /s/ Maureen d. Schimmenti
-------------------------
Maureen d. Schimmenti
Vice President
and Chief Financial Officer,
(Principal Financial Officer)
VI-2